Missed opportunities on the digital agenda

Neelie Kroes, the European commissioner for the digital agenda, sought on your pages in December to defend her plans for a digital Europe (“My plans for a digital Europe,” 13-19 December). Sadly, her recommendation on wholesale prices that competitors should pay for access to incumbents’ networks is a missed opportunity to boost competition, improve regulation and stimulate broadband investment.

The Commission’s recommendation, published on 5 December, is intended to strengthen national regulation by providing more specific direction on the technical details of complex cost calculations.

Incumbent operators like the proposed changes, as they would have increased pricing flexibility, including new opportunities to charge higher wholesale prices to competitors. The Commission hopes they will invest the additional revenue in rolling out broadband – even though most incumbents are already in a very good position to invest (most are sitting on healthy profit levels, EBITDA margins and un-invested cash).

Competitors do not like the proposals, since they would have to pay the higher prices, and fear incumbents could easily erode the benefit that is supposed to compensate them for higher prices – greater assurance that national regulators will require incumbents to provide equivalent access and service quality. Incumbents still retain significant market power in most major markets in most countries. Effective competition has not yet been established. One reason is weak regulation.

The recommendation would make the regulatory process more complex, expensive and time-consuming. It would increase the regulatory barrier for competitors and would-be entrants to the market. The overall effect on incumbents’ incentive to invest in broadband would be inconsequential; for competitors, the incentive to invest would be weakened.

The current problem, potential investors say, is that projected returns do not justify the risk of making a long-term fixed investment in a market with uncertain demand and dependence on the goodwill of entrenched incumbent monopolies. If the biggest element of risk – the cobra-like power of incumbents over national markets – could be neutralised, the environment for broadband investment would become more favourable, especially as interest rates are now very low.

What could be done to unleash competition to stimulate investment in broadband roll-out across Europe?

Firstly, adopt proven best practices in implementing EU telecoms reform policies rather than attempt to micro-manage the cost calculations of 27 national regulators. The UK is the leader in developing competition. Its policy is based on a functional separation between the incumbent’s infrastructure and network services and is implemented by the EU’s strongest national regulatory agency. This is a progressive model for other countries. Potential investors say that structural separation (with separate companies for infrastructure management and for services) would reduce risk further and open new investment opportunities.

Secondly, challenge the hesitant national incumbents finally to enter European markets and compete against each other. Only companies without significant market power in national markets should be allowed to bid for broadband roll-out funds allocated to those markets by national and EU public-sector programmes, including the Connecting Europe Facility.

Thirdly, national governments and EU agencies should use their power as major customers to promote EU competition and universal service policies. When they invite competitive bids to provide broadband and next-generation network services, they should exclude firms with significant market power in the relevant markets.

This policy agenda would strengthen regulation, stimulate competition and break the current Balkanisation of the European telecoms infrastructure being preserved by the national incumbents. The incumbents would scramble to expand their home broadband networks before the new competition arrives, and perhaps for the first time seriously assess opportunities to enter markets abroad in a significant way. New investment opportunities would be opened up for other players, particularly from the ICT industries and independent investment community. These are policies needed to create an efficient broadband infrastructure for a globally competitive Digital Europe. The Commission’s timid recommendation is merely tinkering with the status quo. It relies on the good will of incumbents – a gamble that is bound to fail, as it has throughout the entire quarter-century of EU telecoms reform.

William Melody is a former chief economist at the Federal Communications Commission in the United States and is now a guest professor at the Copenhagen Institute of Technology of Aalborg University.